Northern exposure

Wags are already calling it Northern Crock. Certainly, little about Northern Rock seemed solid yesterday, as was agreed by both City traders (who wiped nearly a third off its share price) and customers queueing up at branches to get their money out. How did the bank that was once a doughty old building society - as much a fixture of north-east England as Newcastle United and Durham County Cricket Club, both of which it sponsored - end up in the kind of mess that left it begging the Bank of England for help?

The answer appears to be an old-fashioned one: bad management. Northern Rock wanted to be king of mortgage lenders, and so it went on a wild lending spree, even when that was no longer a sensible strategy. Base rates rose, economists fretted about British consumers being too deep in debt - and still Northern Rock kept making loans. More advances were made than at a school disco. In the first six months of this year net lending by the bank rose 47%; and there was another £6.2bn of credit agreed but not yet doled out. Even yesterday afternoon anxious customers visiting the bank's website for reassurance would have found instead a large notice asking: "Looking for a loan?"

Well, Northern Rock certainly was. Its business model was based on making loans that it would cover by borrowing from other banks in the money market. That worked well enough - until this summer's turmoil meant financiers became so nervous they would not lend to each other at anything less than punitive rates. Which is why the Bank of England had to step in with emergency credit. The decision has attracted some flak, but it is a sensible one. The collapse of a major mortgage lender would have had much bigger consequences for our economy than an official loan at high interest rates.

The Bank of England oversees the money markets, but it is the Financial Services Authority that is responsible for the institutions on the market; and it is the FSA that should answer some questions. Why was Northern Rock allowed to carry on like this? Compared to rivals, it was lending twice as much against its deposits, a proportion so outlandish it appears plain reckless. The market will sort out the bank - it may now be a takeover target and its bosses are probably just a shareholder revolt away from the chop - but the regulator, whose job it is to spot trouble, also failed. It must get its act together.

What about the Labour government, so long so pleased with its light-touch regulatory regime? The chancellor, Alistair Darling, called this week for "good old-fashioned banking". That may be his solution to the crisis, but it raises another question: what does he mean?

At the root of this market turmoil are sub-prime mortgages, and they are a relatively new thing with an unfortunate name. That does not mean they are bad. Lending to those otherwise unable to get a foot on the housing ladder should be welcomed by progressives. Defenders point out that sub-prime lending has allowed more black, Hispanic and working-class Americans to own a major asset. Financiers and mortgage brokers make for funny agents of social justice, and are typically out for higher returns on their cash. Their greed is what has led to all the horror stories we have read over the past few months. But these are examples of unscrupulous practice rather than some unfixable flaw with the idea. Similarly, securitisation - parcelling up loans then selling them on - can lead to a healthier distribution of risk. It may also encourage fecklessness, as bankers can sell, and forget, the loans they have made. Politicians deal with that not by frowning over newfangled practices, or banning them, but with better regulation. Authorities should demand more information from financiers, and governments must have the nerve to back them up. This summer's crisis has been caused not by new financial instruments but by old-fashioned vices: greed and bad management. The solution is just as traditional: exerting more control.